Prologis Inc (PLD) — Q1 2020 Earnings Call Transcript

Thanks, Mariana, and good morning, everyone. Welcome to our first quarter 2020 earnings conference call. The supplemental document is available on our website at prologis.com under Investor Relations. I'd like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates, as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings. Additionally, our first-quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures. In accordance with Reg G, we have provided a reconciliation to those measures. This morning, we will hear from Gene Reilly, our Chief Investment Officer who will comment on real-time market conditions; and Tom Olinger, our CFO, who will cover results and guidance. Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curless, Ed Nekritz, Colleen McKeown, and Tim Arndt are also here with us today. With that, I'll turn the call over to Gene. And Gene, will you please begin?

Thanks, Tracy. We appreciate everyone joining us today, and we hope you and yours are all well. We're glad to report that our teams are healthy and working productively on a remote basis. Our first quarter was very strong in all types of the business, and Tom will cover these details. I'm going to focus on what we're seeing right now and our outlook for the year. While we are just 30 to 90 days into the COVID economy, we are seeing short-term effects play out very differently across our customer industry sectors. At this time, roughly 60% of our customers are growing, and 40% are shrinking. Next week, Chris Caton will be issuing his fourth COVID white paper specifically on this topic of customer demand segmentation. At the extreme ends of the spectrum, categories like food and beverage and consumer staples have sales up significantly; conversely, clothing and sporting goods and home furnishings are all down sharply. Our customers in contraction are going through a short-term shock; some will recover fairly quickly, others face a longer transition to normalcy, and unfortunately, certain businesses will not survive. At the same time, the pandemic has led to significant growth for the industries I mentioned, serving the stay-at-home economy, and we continue to experience elevated e-commerce demand, with a 40% share of new leasing versus 23% pre-crisis. With the benefit of customer dialogue and applied research, we factored in tailwinds and headwinds to arrive at our revised 2020 earnings guidance. Our portfolio quality, customer composition, and balance sheet strength are mitigating the headwinds, and our disciplined efforts to dispose of $15 billion of non-strategic assets over the past several years are paying dividends today. Turning to the long-term impacts, we believe some of the changes brought on by the pandemic will be durable. COVID is very likely to accelerate a shift from brick-and-mortar to e-commerce retail. We also believe the growing importance of safety stock will lead to higher global inventory levels over time. These trends will increase demand for logistics real estate in the long-term, but will also have a positive effect on 2020 activity, and we're already seeing this. Chris and his team have updated our forecast for logistics real estate market fundamentals and now expect the following for the full year 2020. In the U.S., supply will total 225 million square feet, an 18% year-over-year decline. U.S. net absorption will total 100 million square feet, the lowest level since 2010 and a 55% year-over-year decline, driving the vacancy rate up 90 basis points to 5.4%. Europe will have similar reductions in supply and demand resulting in a 130 basis point vacancy rate increase to 5.2%. Japan's vacancy rate will increase from a record low of 1.4% to 2.8%. In summary, occupancies in all geographies will decline but will end the year at very healthy levels historically. Our proprietary leasing data shows that the spike in leasing activities we witnessed in March, and talked about a couple of weeks ago, has settled down. We are now seeing volumes generally in line with historical trends. Forward-looking data continues to be encouraging. During the last 30 days, we signed 198 leases amounting to 17.5 million square feet, that’s up 21% year-over-year and roughly flat adjusted for portfolio size. Our lease proposal generations are up 21% year-over-year. Lease negotiation gestation periods for new leases have declined by about 14 days year-over-year, and retention was just over 80%, a couple of hundred basis points higher than comparable historical periods. After slicing the data in several different ways, we see three clear themes at this point. First, essential consumer product sectors are driving the demand. Second, e-commerce is driving demand across industry sectors. And third, our larger customers are faring much better than smaller customers in this environment. Now an update on rent relief requests, growth has slowed here. To date, we have received requests representing 4.3% of gross annual rent. Of these requests, 70% were not granted, 23% remain under review, and 7% have been granted in the form of rent deferral loans representing 27 basis points of gross annual rent and an average of about 33 days of rent per customer. As mentioned on our last call, this release is targeted at our smaller customers with legitimate needs stemming from COVID and not through opportunistic requests. We believe the total rent deferral loans granted will eventually amount to about 90 basis points of gross annual rent, with these loans scheduled for repayment over the remainder of 2020. Turning to the strategic capital business, our investors remain very positive on the logistics real estate sector. As noted on our last call, the vast majority of redemptions to date were in progress prior to COVID-19, and there appears to be good secondary market interest for some portion of the redemption activity, but to date we have seen no trades on the secondary market. Next, I would like to provide some context for the updated capital deployment guidance Tom will detail in a moment. This guidance assumes virtually no incremental activity in acquisitions, dispositions, speculative development, or contributions. Rather than speculate on future market conditions, we are guiding to volumes that have largely been accomplished already. Most of the volume predicted between now and the year-end is build-to-suit activity where the pipeline remains active with multiple leases signed post-COVID. We continue to work closely with customers and municipalities on 30 ongoing projects in 14 markets. Construction continues on 22 of these projects, with eight having been halted by local authorities. To date, we have yet to stop a project at the request of a customer. While our current leasing data is holding up very well and we see extremely encouraging trends with e-commerce leasing, we're planning for a reduced demand environment through the end of 2020. We will have opportunities to serve our customer segments in expansion mode and we will need to support others not so fortunate. We expect to serve as a reliable alternative for build-to-suit customers, take advantage of investment opportunities as they emerge, and manage our strategic capital vehicles prudently and opportunistically in this environment. And with that, I'll turn it over to Tom.

Thanks, Gene. First and foremost, I want to echo Gene’s introductory comments and wish you and your families the best of health during these challenging times. I'll briefly discuss Q1 and then take you through our updated guidance. Starting with results, core FFO for the first quarter was $0.83 a share, which was in line with our pre-COVID expectations. We did recognize an expense of $5 million in the quarter, or a little less than $0.01 per share, related to our donation to the Prologis Foundation for COVID-19 relief efforts. During the quarter, we completed the acquisition and integration for both the IPT and Liberty portfolios. We hit our synergy targets, and both portfolios are performing well and in line with our expectations. We leased 34.7 million square feet in the quarter, with ending occupancy of 95.5%, down 100 basis points sequentially as expected. Rent change on rollover remains strong at 25% and was led by the U.S. at 31%. Our share of cash same-store NOI growth was 4.6%, which was about 30 basis points above our forecast. Same-store average occupancy for the quarter was 85 basis points lower year-over-year, again, consistent with our expectations. As of yesterday, we've collected 85% of April rent, which is in line with our normal pace. Rent due dates vary by country, and about 5% of our rent isn't due until the back half of the month. As Gene noted, we've granted $18 million in rent deferrals, $9 million of which relates to April. All granted deferrals are structured to be repaid in 2020. For deployment, we started $300 million in new development projects which were 85% pre-leased. Stabilizations totaled $690 million with an estimated margin of 39% and value creation of $270 million. Additionally, we realized more than $280 million in development gains through early April. Looking to the balance sheet, we enter this crisis in a position of strength with significant liquidity and borrowing capacity. Liquidity at quarter-end was $4.6 billion, and we have cleared out our debt maturities until 2022. The combined leverage capacity of Prologis and our open-ended vehicles, at levels in line with current ratings, is well over $10 billion. Turning to guidance for 2020; our approach is twofold: first, to exercise prudence; and second, use a broader range of outcomes given the uncertainty. While the full economic impact is difficult to quantify, our guidance assumes reduced demand into the third quarter, with the operating environment beginning to recover towards the end of the year. Here are the key components of our guidance on our share basis. Our cash same-store NOI, we’re decreasing the midpoint by 225 basis points and now expect growth to range between 1.75% and 3.25%. The decrease in the midpoint assumes average occupancy will be down 100 basis points in a range between 94.5% and 95.5%. We expect retention to increase about 500 basis points and be in the mid-70% range. We are estimating bad debt expense to range between 100 basis points and 150 basis points of gross revenues. The midpoint of 125 basis points compares to 20 basis points of bad debt expense embedded in our prior guide. It's important to note this bad debt midpoint is on an annual basis, which means we've reserved a much higher percentage based on the remaining 2020 revenue, particularly if our positive cash collection trends continue. As we discussed in our call earlier this month, our bad debt expense peaked at 56 basis points during the global financial crisis. At the midpoint, our annual guidance for bad debt is more than double that historical high and almost three times that level at the upper end of the range, again, on an annualized basis. As Gene mentioned, we believe rent deferrals granted will amount to about 90 basis points. While we expect these deferrals to be repaid, we have factored in the potential for credit loss for the deferrals as well as elsewhere in the portfolio. We have included the impact of downtime resulting from potential bad debt in our occupancy forecast. We're assuming no rent growth for the remainder of the year. Rents for leases signed since March 1st have been about 200 basis points ahead of our expectations, while rents for leases signed in the first two months of this year were about 100 basis points better. We expect rent change to be in the mid-20% range and keep in mind our in-place to market rent spread is currently approximately 15%. For strategic capital, we expect revenue excluding promotes to range between $345 million and $355 million, down $5 million due to lower forecasted deployment by our funds. We are maintaining our net promote income for the full year of $0.15 per share based on quarter-end valuations. The vast majority of the 2020 promote revenue will be recognized in the second quarter. For net G&A, we're forecasting a range between $270 million and $280 million, down $5 million at the midpoint. Our G&A for the year is down about $10 million due primarily to lower travel and entertainment, offset by the $5 million contribution to the Foundation. From a foreign currency standpoint, we continue to be extremely well insulated from FX movements through the next three years, and our U.S. dollar net equity is over 95%. As Gene mentioned, we stopped all new speculative development and have halted construction on many spec projects that had recently started. We now expect development starts for the year to range between $500 million and $800 million, with build-to-suits comprising more than 70% of this volume. The cost to complete our active development pipeline is currently $1.6 billion. For acquisitions and dispositions and contributions guidance; while not our expectation, we are simply forecasting no incremental activity other than a few transactions currently under contract. For net deployment uses, we're now projecting $200 million at the midpoint, down $450 million from our prior guidance. The net deployment changes had minimal impact on earnings given the timing of that activity. Taking these assumptions into account, we are lowering our 2020 core FFO guidance midpoint by $0.11. We now expect a range between $3.55 and $3.65 per share, which includes $0.15 of net promote income. We believe we've approached the forecast quite conservatively with no assumptions made more severe than what we know today. We have limited roll, dramatically reduced deployment, and reserved for bad debt at multiples of the GFC. Even with that year-over-year growth at the midpoint excluding promotes remained strong at over 10%, all while keeping leverage flat. We continue to maintain significant dividend coverage at 1.5 times, and our 2020 guidance implies a payout ratio in the mid-60% range. Longer term, we feel more positive about our business given the emergence of two new structural demand drivers. First, there will be a need for more inventory as supply chains emphasize resiliency over efficiency; and second, an acceleration of e-commerce adoption. In closing, 2020 will be a tough year for many, however, despite the uncertainty, Prologis is very well prepared. We enter this unprecedented time with the healthiest fundamentals on record, an extremely well-positioned portfolio, a significant in-place to market rent spread, and a strong balance sheet. And with that, I'll turn it back to the operator for your questions.

Gene, you gave some good high-level color here at the start. I was just wondering if you could break it down a little further here in terms what you're seeing or if you foresee any outside impact from any particular region or city, big box or small box, infill or secondary markets. Maybe just a little color on what you're seeing across those channels, what your expectations are? And then as a follow-up question outside the same-store pool, are your occupancy and bad debt assumptions similar to the recent portfolios you closed, Liberty in particular? Thanks.

Sure. Regarding the composition of demand, it seems to be more related to industry segments and size rather than specific geographical areas. Our Houston operation is currently facing challenges due to COVID and declining oil prices, making it our most difficult market. However, the strongest segments are those I previously mentioned. In this situation, smaller customers are struggling more than larger ones. One market to note is Atlanta, where we also have a significant number of smaller customers. Tom, would you like to add anything?

Yes, Jeremy. From a bad debt perspective, we looked at the portfolio across the entire stack. We looked by industry, the customer composition, and we looked at it consistently across the entire portfolio. So we don't see anything unique about any of our recently acquired portfolios.

It might be too early to be asking about 2021. But just given the sort of slowdown in pace or trajectory in ‘20, how do we think about your 2021 growth? And how that's going to sort of either slow or maybe rebound quicker as we sit today?

I think our business is going to be somewhat slower before the vaccine and much higher after the vaccine. So you tell me when the vaccine is going to come through, which is a real permanent solution, and I'll tell you how that makes us going to work for the year.

Thank you. I was hoping you could focus a little bit more on the smaller tenant discussion. I mean, what have you seen in terms of government stimulus being able to actually help out those tenants? Just maybe some more color in terms of how bad is it really for small versus large and what are the factors you guys are watching to see if they get help or they're not going to get help or just as much color as you can provide would be great?

Jamie, I want to clarify that smaller tenants do not always equate to smaller companies in those spaces. It's important to differentiate between small, independent businesses and smaller branches of creditworthy companies. Not all small tenants are facing difficulties. Additionally, if you're involved in residential construction or the automotive sector, your business is likely suffering in this situation. It's still early to assess the impact of government support, but based on what we've discussed, it seems unlikely that it will fully offset the revenue and margins lost during this time. However, much of the demand for these products may just be delayed. If they can endure this crisis, they may benefit when things improve afterward. The stimulus has only been in place for less than two weeks, but there's also significant monetary stimulus alongside the fiscal support that has emerged. From what I observe with the banking system now, the banks are better capitalized, and there seems to be a willingness to cooperate with customers, as everyone understands that this situation is unprecedented. There's a visible shift in the approach from the government, fiscal measures, monetary actions, and the banks distributing funds. I believe they will assist their customers, including the smaller ones, although some may unfortunately not survive.

Two quick ones really, just one on the bad debt that you've baked in. Can you just clarify, have you seen any bad debt in the first quarter, and can you talk about the second quarter? And then just second question on market rent growth. You referenced baking in no rent growth. I just want to clarify, are you referring to market rent growth in 2020? And just give us a little bit more color maybe by major regions?

Let me pick up on the rent growth question, and then I'll pitch it over to Tom for the first part of your question on credit loss. Let me give you the facts on rent growth. Rent growth in January and February were 100 basis points higher than what we had projected for those specific spaces. Rent growth for March surprisingly was 200 basis points higher than what we had projected for those spaces. So, so far we haven't seen evidence of rental decline or deceleration in growth. However, we've assumed that in the forecast that Tom shared with you because absent perfect information, you got to be conservative with respect to rental growth forecast. So those are two specific data points. The third data point I'll give you is that we have projected certain grants for the two acquired portfolios, IPT and LPT. In both cases, the spaces that we've rolled over have been in the range of 4% to 5% higher rents than we had forecast for those portfolios late last year when we underwrote them. Tom, do you want to talk about the credit loss?

Yes. So on bad debt experienced in the first quarter, we saw write-offs of 25 basis points. In April, we've seen nothing unusual, as I talked about our April collections are trending normally, as did March. As I mentioned, we are conservative here by almost any measure you can look at on the bad debt, and we're reserved appropriately to cover a really severe downside on the AR side.

So you guys mentioned that you are moving forward with the 30 build-to-suits under construction. Are there other build-to-suits that might've been in the plan to start construction later this year? If so, can you talk about the probability of those continuing as planned as well and whether there are any kind of renegotiations happening on those with respect to the rent side of the equation?

Hey, Blaine. It’s Mike Curless. The 30 build-to-suits are well underway. We haven't heard anything from any customers to say differently, so that is a very good sign. In terms of the prospect list, I would say it's a bit shorter in number, but the people on that list are as active as ever. E-commerce is a big driver of those. You've read a lot about Amazon's activity across the board. We've seen signed leases this year. In order of magnitude, we signed 10 leases this year compared to seven this time last year. Three of those, as Gene mentioned, came in the last several weeks. So it’s a bunch of good signs with respect to the underpinning of e-commerce relative to build-to-suit. I'm not seeing any renegotiations underway, and we have really good opportunities for tailwind here given the lack of spec that you're going to see in the marketplace. So I'd say the prospect list is naturally a bit shorter but pretty robust, and we're optimistic about the build-to-suit activity this year.

Good morning. Just a question on bad debt guidance. On the business update call, you mentioned that bad debt could trend as high as 100 basis points, and now guidance incorporates 125 basis points at the midpoint. I know these are similar figures, but just curious if you saw anything in the last few weeks that made that estimate trend higher?

No, just let me clarify. We did not actually guide on bad debt in any way, and we were very careful to draw the distinction between operating performance and any kind of financial guidance. The number that we talked about 100 basis points on that call is equivalent to the 90 basis points that Gene talked about. That is the forecast amount of total rent that is going to be subject to deferral. That is related but not the same concept as the write-off because we fully expect obviously the ones that we have deferred to make good on that deferral. Now a portion of them will probably default, and a portion of the ones that didn't ask for a deferment could default. So the 90 basis points of deferral is very different than the 125 basis points on average of credit loss. The other thing I want to make sure you understand is that the 125 basis points is applied across the year. And certainly, as you heard from Tom, the first quarter was 20 basis points, and we know what that was. So we're carrying another 100 basis points of room from the first quarter into future quarters, and we've got 125 basis points to start with across the whole year. So the amount that we have reserved for anything that could default is significantly higher than what appears on the surface. Let me be even more specific. Not all tenants are going to default that are going to default are going to default on April 1st. If they default, they're likely to default during the course of the year. So on average, they're going to default in July. If you just ratably divide it, which means on that basis alone we’re almost three times the actual number covered for default risk and default outcomes. And another way you can get at it is that in the global financial crisis, the total written off debt averaged 56 basis points annually, and the midpoint this time around is 125 basis points for the remaining, more than 125 basis points for the remaining three quarters significantly higher. So we've got a scenario multiples of times of the global financial crisis factored in.

Just curious, any of the rent deferral requests from tenants that paid April but are worried about being able to pay May? Just separately maybe for Chris, you kind of put out a hundred, or you put out your net absorption figures and construction figures this year. Just as we think about ’21, I know you're giving guidance. But do you think the slowdown in deliveries in ‘21 and with the rebound in absorption could result in better than expected snap backs in ’21?

I do, I don't know what Chris thinks. But again, snapbacks are not going to happen until everybody's got the all-clear signal on the health front. Everybody talks about the government, when they are going to put people back to work and open up the country for business and all these demonstrations that we see; that’s got nothing to do with it. Even if they open up the place for business, a lot of people will have to go back to work and will, but the lot of people who don't have to go to work won’t. So I don't think the government action is going to be the trigger for that. I think the all-clear is going to have to come from the health front.

And I think, let me just finish up the answer here, which is to me he's already given me a view on the demand, but it's also important to remember a view on supply. Right now in the marketplace, we are seeing projects that were not started and that's kind of a material impact on the outlook for delivery in 2021.

Tom, you mentioned that customers are focusing on resiliency over efficiency now. How do you see this playing out, and how are you positioning your portfolio and investments or build-to-suit activity to assist either with the shift or what it takes part in this shift?

So I think our portfolio is already positioned to capture that activity, number one, just given the proximity of the portfolio to the consumption base. As we see further acceleration, along with the long-term e-commerce trends, I think we are right there to capture that. And then on the resiliency versus efficiency comment, it's clear customers will carry more inventories to protect themselves against future shocks. We'll see that, and they're going to want that inventory close to the consumption base to meet consumer demands for delivery time. So I think our portfolio today is positioned, and we're going to continue to build out our land bank and further solidify our portfolio.

I remember about six weeks ago, you announced the share buyback program. Given the public perception surrounding share buybacks and landlords, do you believe it is wise to proceed with buybacks even if the stock price declines significantly? Also, I have another question: what do you think social distancing will mean for various industries in your area? Some users have very few people in their facilities at any given time, while others might have different scenarios.

I believe you were cut off, but I understand your question. Regarding social distancing, certain customer categories, like those serving the convention and hospitality industries and airlines, will likely continue to struggle. If you're asking about the impact on the occupants of our buildings, our most people-intensive operations involve e-commerce businesses. You’ve likely read the same discussions about Amazon and other e-commerce companies. Some controversy surrounds them, but I believe they have been quite responsible during this challenging time, providing significant employment and implementing measures such as temperature checks. I understand they are moving towards regular testing, including serology tests. They are doing their best to resume business operations so people can access essentials. I commend them for that. As for the share buyback program, we repurchased $35 million worth of stock when prices dipped into the 60s, which we felt was a substantial discount to NAV and appeared to be a compelling opportunity. However, I later reconsidered and realized the perception of this action might not be favorable. We decided to reinvest the profits from that buyback into the Prologis Foundation, which amounted to a significant sum. I believe this will lead to positive outcomes moving forward. While I haven't fully assessed the public perception of this decision, we made a profit, and we intend to use it for a good cause.

Just a quick question on short-term leasing and lease terminations actually. So lease terminations while too small have almost doubled as a percent of revenue this quarter versus Q1 last year and versus the last quarter that is Q4 of 2019. So just trying to understand besides the bad debt and all that, just trying to understand what you're seeing in terms of tenants from markets that are seeing elevated levels of terminations? Any color would be useful.

This is Tom, Sumit. On the lease terminations, there's nothing unique; they’re episodic. What we saw in Q1 was not particularly unusual. It was just related to a tenant’s needs, and we helped them out in another space as well. There were couples like that. So it’s episodic. There's no trending that we see with termination fees foreshadowing any other type of activity. I just don't see it.

So the only thing I would add to Tom's answer is that it's a billion-square-foot portfolio. In our business, unlike the office business, there's not a lot of lease termination fee anyway. So it's one of those things where a very small number could have increased by a large percentage, and it's still a very small number, and those things moved around by very specific decisions. Keep in mind we have a 15% spread to market, and that spread, if anything, is still there and maybe we've expanded a little bit. So sometimes the lease terminations are an opportunity for us to make some money on buying out a tenant and actually make some more money by re-leasing the space. So lease terminations are not necessarily bad in our business and they're minuscule in the scale of the portfolio. I apologize if we don't remember every single one of them. We have over 8,000 leases.

So first question, can you just talk about your exposure to at-risk tenancy or industry? And the second, just taking a step back, if I put your comments about rent spreads and market rent being flat, putting it all together, it kind of seems a little bit optimistic given what's going on in the macro fund. So, what am I missing from your views? Is it really the tenant by tenant leasing that you're doing that gives you confidence in that or something else?

Well, first of all, I don't think I gave you a forecast for market rent. I was very careful to tell you, let me tell you actually what has happened. I distinguish between the activity in January and February, which was up 1% compared to our expectations versus March that was up 2%. But our forecasts don't incorporate rents going up; we basically pushed that out for the balance of this year. And as someone else pointed out, we haven't issued guidance for next year but we do think there's going to be a snapback next year that's going to result in rent growth. If you were going to ask me right now, it's not a fully baked idea. So our official view on rent growth is that it's flat for the year, and we're writing out some rent growth. So you can think of it as a slight decline or something, but we're not smart enough to be able to forecast those things with precision. The good news is that market rent growth has very little to do with our numbers in the near future. We have only 8% of the space that rolls over, and we have a 15% mark to market and a greater amount on the ones that roll over this year. So really what drives rent and operating results is the mark-to-market and the small percentage of rollover. So I don't think it's going to be a big deal.

Just two quick questions. Do you have an economic forecast that underlies your operating guidance this year? And then just regarding the kind of the safety stock and inventory resilience team, have you talked with any customers and specific industries that have brought this up, or is this kind of your assumptions just based on your experience or your internal data? Thank you.

Eric, honestly, I'm really surprised with your question. Have we talked to any customers? That just really blows me away. We are very customer-centric. We have a Chief Customer Officer who, in addition as part of the executive team, spends all his time with a dedicated team talking to our major customers. We have over 500 customer-facing people in the field that are in constant dialogue with our customers. So yes, we do speak to our customers quite a bit. As to economic forecast, I don't spend a lot of time looking at economic forecasts because I've seen much smarter people than Prologis have forecasts that are down 5% a year, and some that have down 40% this year. So I don't know what it is. I just look at customer behavior when we forecast our business. Yes, in the long term, our business is completely correlated with consumption, which is highly correlated with economic growth or decline. But in the short term, the dynamics of e-commerce, the stay-at-home economy, and the need to carry more inventory overwhelm those kinds of longer-term considerations.

I was hoping you could provide some more color on the rent deferments, the 33 days of average rent that is being deferred on those specific tenants. Is that enough for them to survive this type of market turmoil? I mean, I'm assuming you've done that type of analysis. And I think as the second part, what percentage of these smaller tenants qualify for the stimulus package? And does that give you more confidence that you're going to be able to collect these deferments by the end of the year?

Yes, there's a high percentage of our customers that we've been interacting with and that we think will qualify for the stimulus, and we're seeing evidence of that already in the U.S. We've had several examples where customers initially contacted us only to call us two weeks later and say, hey, look, this stimulus kicked in. So you know, May will be a little bit of a wait and see, but we expect a high percentage of those customers receiving that activity. And then with respect to the 33 days, again as Hamid mentioned, we know our customers very well. We've had a very thorough process. We've looked at their financials; they filled out the questionnaires. That's been our best estimate of what's going to be necessary to bridge them to the next opportunity for them. So that's where we are.

And just kind of the last question, as you heard in our update call and I think you heard somewhere today about 20% to 25% of our customer base at some point has had a discussion regarding some kind of rent deferral. Of course, on those we've granted a very small portion of it. We expect to ultimately maybe grant 30%. Today, it’s more like 5%. So that alone means we've had direct discussions with 25% of the customer base. On a billion-square-foot portfolio, that's 250 million square feet. So we've had conversations, multiple sizes of many, many big companies in the sector with our customers just about that topic during this period of time. So yes, we're really talking to customers all the time.

I might've missed this and if I did, just tell me. But I don't think you mentioned anything about near-shoring or on-shoring as effect on your business. And then second, Tom, it looks to me like the back of the envelope midpoint of your guidance is a pretty strong ramp, $0.85 to $0.87 to $0.89. Could you talk a little bit about how GAAP accounting plays into your rent deferrals?

Yes, on the on-shoring. Most of the stuff is going to get on-shored from China and possibly from Mexico to the U.S. at least with respect to the U.S. and Europe. I don't think that much is going to change. It's probably going to be China shifting to European production. As you know, our Chinese strategy, first of all, it's a very, very small part of our portfolio. It's about 1.5% of our income is in China. Secondly, it's totally focused towards domestic consumption. We learned very quickly that the export business doesn't generate a lot of industrial demand because containers are the warehouse. So to the extent that there's more on-shoring in the consumption markets, the U.S. and Europe, I'm not counting on it, but by definition, that's incremental demand on top of the consumption demand. It should help on the margin. The reason we haven't really factored in it is that those are likely to go to really lower-cost locations and where real estate is cheap and labor is cheap, and we're really well positioned for the infill large urban market. So likely you're not going to put a plant to on-shore in downtown San Francisco or any place like that, or LA; you're going to go to a cheaper environment. So I think it will be an important positive for U.S. and European demand. But I'm not sure we, because of our geography, are going to be the biggest beneficiaries of that. I think people who are in more remote locations will probably benefit from that. Tom, you want to take the other part of the question?

Yes, your other question on the rent deferrals and the accounting analysis of that. So the way we're structuring our rent deferrals is extending the payment term. As we mentioned, the payment term, the due dates are within 2020. We certainly expect them to be paid, but the whole analysis on the collectability when you book that revenue, you gauge that revenue to be collectible, and that's just assessment. This is relating to April revenue that's being deferred, and you make the assessment in April as to the collectability of that revenue, and you either book that revenue or you book a reserve or a portion reserve against that based on your assessment of collectability. And then regarding the ramping or what earnings look like from a quarterly perspective, clearly, Q2 will be heavily influenced by the promote because that's when the bulk of that will land. It's really a function of what we see, quite frankly, from a bad debt experience. As we said, we've got a lot of bad debt reserve that's sitting there for the rest of the year. I think our results are going to move relative to what happens there.

The only thing that I would add, John, to that is that prior to these downward adjustments, our year-over-year growth was on the order of, I think, 13%, 14% FFO growth, actually. And that's a big number. So it's come down 4%. So maybe another way of asking your question is how come your guidance previously was so high and still is high. The reason for that is primarily that the volume of development starts in prior years that we're just having capitalized interest in them are now coming on, and there are a lot of build-to-suits in those and those are now fully income-producing. We had them in the denominator as capital expenditures where we weren’t earning a whole lot on them. As they stabilized and they're leased, those extra earnings are coming online. It has nothing to do with this changed environment. It was just high to start with because of that and remains pretty healthy. I mean, I think 10% growth year-over-year, even in the strongest environments, without increasing leverage.

Maybe for Tom and Hamid, just about asset values. I know Tom, you talked about the promote being consistent in the guidance, and the reason why is the pricing at the end of the first quarter. I guess I just wanted to drill on that if I could and the idea that you guys have taken market rents to more of a neutral stance this year; you've taken market vacancy outlook higher. I guess maybe why wouldn't that impact the valuation of assets as you sit here in a very point in time? And is there any risk to that promote? And then maybe just a follow-up to that, Gene you’d said something earlier that the number of leases that you were doing, I think was flat on a portfolio size adjusted basis. Did you give the square footage for those and are they smaller deals in the pipeline or larger ones? Any color there would be helpful as well? Thank you.

On the appraisals, what we've seen in the first quarter appraisals is that generally the numbers are up very slightly, but the appraisers have stickered the appraisals as they normally do, and markets with turmoil talk about there are no cons, et cetera, et cetera. But the real answer on that is that because promotes are such a sensitive calculation to the terminal value; these are generally three-year promotes. If you move around the terminal value a little bit, the promotes can move around. We're generally very conservative in projecting and guiding promotes. We feel like we've got sufficient room to absorb any kind of downside there. The other thing I would say is that more than half of the projected promote is a holdback of promote from three years ago, and the amount of which was determined and calculated and is known and that number will not change. So a big portion of that number we know exactly what it is, more than 50%. So to the extent there's variability on that last, I would say 40% of it, 60% of it is backed.

Well, let me just answer the second part of the question, which is the experience in the last 30 days of leasing. We have seen more leasing in the bigger size segments, so we'll be happy to clarify that for you later on, but definitely bigger customers.

You've covered a lot, so let's do this. So PLD has grown rapidly and I will say appreciably over the past few years and in 2019 had additional large acquisitions. Meanwhile, investor sentiment has so far remained positive on industrial rates. However, amid this serious pause and probable tenant shakeout, what is it about the larger portfolio and positioning, you know which makes you most optimistic in these uncertain times?

Well, we've had a half of experience on the two latest acquisitions. And Tom, last time we talked about this a couple of days ago, we were up about 5% on our underwriting of those portfolios based on activity that's already taking place. So we feel really good about it. Oh sure, Houston energy is worse than we thought, and Liberty had a pretty significant presence in Houston, and we did too; but again it is a billion-square-foot portfolio. On the other hand, Pennsylvania has done a lot better than we thought previously because a lot of the New York adjacent demand and the big boxes have, for some strange reason, taken up a lot of space in Pennsylvania. So that's looking better and that's actually a bigger portfolio. So net, net, all the reasons for which we did those investments that we articulated before stand. And on top of that, they've just performed better than we expected, so that's a really good start. I don't know whether that will continue for the next 10 years, but it's better to be 5% ahead of the game than behind the game when you're getting off the block. Does that answer your question? Let's give him an opportunity to ask it again because it was a complicated question. So if we didn't answer it, ask it again.

I was wondering if you can address a little bit on the capital deployment of what you've changed, and looking at the press release, you've brought down your acquisition volumes, both building and land by a billion and a quarter. Commensurately, you've cut down your disposition volumes as well, and you've obviously made a big cut to the development side in terms of starts, which obviously had capital commitments out in the future. I want to know two things: one, why not take advantage of the marketplace and continue to sell and build liquidities and continue to reshape the portfolio, which you’ve done in a number of years to improve its quality and location? So why not sell more? And then the second part is on the development side, where you've taken a much more conservative approach and ramped down your development. What are you seeing from the industry at large in terms of development? So two separate topics somewhat connected, if you can address that, that would be great.

We are chickens, and chickens live longer. I mean, when the world is going or falling off the cliff and everybody's talking about GDP going down 40% this quarter or whatever. We had some spec developments; we can try them anytime, they’re entitled, they're ready to go. If we see the demand, we'll start them two months later. We're not saying that's our forecast. We're saying every quarter we've got to get in front of you guys and give you some assessment of what we think is going to happen. This is a very turbulent time. I think the fact that we've even put out guidance, and by the way we don't have the advantage of looking at all the other people and figuring out what they're doing to sort of tailor our message accordingly. We're going back first and we've got to stick our neck out. We have and we've given a range. We have taken a conservative approach, saying that we're not going to deploy any new capital on discretionary starts of speculative projects, and we're not going to buy anything at yesterday's prices. If prices become different, for sure, we're going to use our resources. We have over $10 billion, $11 billion of capacity between the funds and the balance sheet, and we will certainly start those developments once there is leasing that we feel really comfortable about going forward. We can't predict that; there's no cost to waiting, there's only upside in waiting. So we've covered the downside. We're still well positioned for the upside. It's not intended to be a forecast. It's just a prudent thing to do. I hope we're wrong about that, and we'll do closer to what we have planned on doing before. But we're not going to get over our skis.

I get something along the same lines just a quick follow up and then a question. One is, if you could just talk about when you see occupancy bottoming in the portfolio? I know you guys said kind of towards year end things improved. But I'm curious more detailed how you see things through, what the trajectory is for occupancy? And then bigger picture as we think about potential cracks, obviously, there's a lot of cracks. But are you seeing distress among competitors or just versus prior downturns that you've seen? Where do you think, where's the most risk that maybe people aren't thinking about?

Yes, I think we will get a significant increase in occupancy the quarter or the quarter after the vaccine is likely available, maybe even when it's announced and it's definite that it's coming, based on the anticipation of it coming. So you tell me again the date, and I'll tell you when that will be. From everything I hear, it's going to be more like next summer-ish, although, there are some really positive developments that I've been hearing about from the scientific community. I mean, we've got a couple of really big medical centers here, and I'm in constant dialogue with them. On the therapeutic side, there are some really good things happening that we may even hear about in the August, September timeframe. So I think that's when the occupancies will turn around. In terms of the cracks, I would say as I guess Warren Buffett says we'll find out who's been swimming naked as the tide recedes. There are some people that have been, mostly on the private side, by the way; I’m pretty proud of my public brethren by and large, they've really behaved well throughout the cycle. I think everybody's kind of pretty disciplined in the sector. There are a couple of private players, particularly in parts of Europe, Central and Eastern Europe being a good example that have really gotten out there on their skis, and we'll see what happens. Maybe they're really good skiers. But I would say of all the cycles I've seen, whether it's the ‘87 collapse or the SNL crisis or dot-com or the GSV, I would say there is less of that around, much less of that around than any one of those cycles. I think we are over our time allotment, and we've taken way too much of your time this quarter with two calls. So let me thank you for your interest in the company and invite you to our next quarterly call. Hopefully, we'll all be much more optimistic than we are in this environment, and everyone stay healthy. Take care.